Venture Capital Trusts are investments in smaller UK companies, with a government incentive built in: tax relief of 30% paid up front. Investment advice should be taken on VCT investments, however, to assess the risk level of the underlying company or project in which your chosen VCT invests.
Furthermore, a VCT carries with it the condition that it is a minimum 5-year investment, and if you withdraw your cash before the end of the term, the tax relief you received must be repaid.
When VCTs were first introduced in 1995, they were initially regarded as high risk investments, due to the proviso that they had to invest in companies with less than 50 employees, and market capitalisation of under £7m. In other words, government thinking was that VCTs would provide an alternative to bank finance for small, growing companies struggling to expand.
However, market conditions are slightly different today, and a prudently chosen and well-managed VCT investment, chosen with quality investments advice from an independent investment adviser, may well be a lot less risky than it used to be.
VCTs are the unwitting beneficiaries of the recent ‘credit crunch’ which as of today (January 2011) seems largely still in place, as government continues to urge banks to step up lending to smaller companies.
As a higher percentage of small companies are unable to obtain bank funding, the quality of those looking to VCTs as an alternative cash source has dramatically increased – which is good news for VCT investors, as the risk level of the trusts themselves may be considerably reduced.
As a result, more and more investors see a place for a Venture Capital Trust as a building block in their investment portfolios.
